Financial regulation in low-income countries: Balancing inclusive growth with financial stability
Lead Research Organisation:
Overseas Development Institute
Department Name: International Economic Development Group
Abstract
The global financial crisis of 2007/08 sparked a reassessment of the relationship between the financial and real sectors in many countries. The project aims to build a bridge between on-going discussions and important measures on reforming financial regulation at global level in the wake of the international financial crisis, and measures needed to strengthen financial stability and support growth in African LICs. We will do this through high quality academic research, both quantitative and qualitative , as well as close interaction with policy-makers.
The focus of this proposed research is low-income countries (LICs), in Sub-Saharan Africa (SSA). As the structure, capacities and needs of these economies differ significantly from developed countries, the approach to both domestic and external finance should also differ. Our central research questions are :
1. What are the optimal structures for a) the domestic financial system, and b) the level and composition of capital inflows in LICs to facilitate high levels of inclusive growth while maintaining financial stability?
2. How should domestic and external regulation be designed to encourage inclusive growth and stability?
Phase 1 entails two systematic reviews. The first reviews evidence on a) the relationship between domestic financial structures and inclusive growth and stability, b) the links between financial regulation and financial structure, and c) the role of contextual factors influencing these. The second reviews evidence on a) the optimal pattern of capital flows to maximise growth while maintaining stability, and b) how the level and composition of inflows is affected by external regulation
While both reviews focus on LICs, evidence from today's successful emerging economies will also be examined. In each case, the aim will be first to identify 'optimal' structures (domestic and external) and 'optimal' regulatory approaches to achieve these structures. Once established, these will then be modified by contextual factors reflecting the reality of LIC economies, both structural and in terms of capacity constraints.
Phase 2 of the research will be empirical, entailing quantitative work, in-depth case-studies and focused policy analysis. Econometric analysis will assess trade-offs between growth and stability domestically, with a particular focus on how different levels of bank capital affect level and cost of credit in SSA. Externally, we will investigate econometrically the role of private capital inflows on economic growth and income distribution, reflecting the fact that the existing literature remains inconclusive. A new dataset will be constructed during this work.
The country case studies will be Ghana, Kenya, Nigeria and Ethiopia. Ghana and Kenya have lightly regulated financial systems and fairly open capital accounts. Nigeria is a large, oil-based economy, with a more sophisticated financial system and domestic banks penetrating other African markets. Ethiopia has a heavily regulated banking based financial sector in early stage of development, with restricted capital account.
The case studies will link policy-making in LICs with an evidence based understanding of the relationships between domestic and external financial structures, growth and stability, and financial regulation. Building on the systematic reviews and empirical work we will develop policy proposals in Phase 3 to bring 'feasible' financial regulation and structure closer to 'optimal' forms for the particular context. As well as providing detailed policy recommendations for our case-study countries, we will draw lessons for LICs where appropriate in a range of research outputs targeted to key audiences.
The UK based research team has a range of relevant skills and experience, which will be complemented by our partners in the case-study countries. Throughout the project, we will benefit from the inputs of an Advisory Committee of senior African policy makers.
The focus of this proposed research is low-income countries (LICs), in Sub-Saharan Africa (SSA). As the structure, capacities and needs of these economies differ significantly from developed countries, the approach to both domestic and external finance should also differ. Our central research questions are :
1. What are the optimal structures for a) the domestic financial system, and b) the level and composition of capital inflows in LICs to facilitate high levels of inclusive growth while maintaining financial stability?
2. How should domestic and external regulation be designed to encourage inclusive growth and stability?
Phase 1 entails two systematic reviews. The first reviews evidence on a) the relationship between domestic financial structures and inclusive growth and stability, b) the links between financial regulation and financial structure, and c) the role of contextual factors influencing these. The second reviews evidence on a) the optimal pattern of capital flows to maximise growth while maintaining stability, and b) how the level and composition of inflows is affected by external regulation
While both reviews focus on LICs, evidence from today's successful emerging economies will also be examined. In each case, the aim will be first to identify 'optimal' structures (domestic and external) and 'optimal' regulatory approaches to achieve these structures. Once established, these will then be modified by contextual factors reflecting the reality of LIC economies, both structural and in terms of capacity constraints.
Phase 2 of the research will be empirical, entailing quantitative work, in-depth case-studies and focused policy analysis. Econometric analysis will assess trade-offs between growth and stability domestically, with a particular focus on how different levels of bank capital affect level and cost of credit in SSA. Externally, we will investigate econometrically the role of private capital inflows on economic growth and income distribution, reflecting the fact that the existing literature remains inconclusive. A new dataset will be constructed during this work.
The country case studies will be Ghana, Kenya, Nigeria and Ethiopia. Ghana and Kenya have lightly regulated financial systems and fairly open capital accounts. Nigeria is a large, oil-based economy, with a more sophisticated financial system and domestic banks penetrating other African markets. Ethiopia has a heavily regulated banking based financial sector in early stage of development, with restricted capital account.
The case studies will link policy-making in LICs with an evidence based understanding of the relationships between domestic and external financial structures, growth and stability, and financial regulation. Building on the systematic reviews and empirical work we will develop policy proposals in Phase 3 to bring 'feasible' financial regulation and structure closer to 'optimal' forms for the particular context. As well as providing detailed policy recommendations for our case-study countries, we will draw lessons for LICs where appropriate in a range of research outputs targeted to key audiences.
The UK based research team has a range of relevant skills and experience, which will be complemented by our partners in the case-study countries. Throughout the project, we will benefit from the inputs of an Advisory Committee of senior African policy makers.
Planned Impact
Non-academic beneficiaries would include : a) national policy-makers such as financial regulators, central bankers , development bankers and Finance Ministry officials in LICs, as well as developed countries, b)regional institutions, such as African Development Bank (AFDB) and Association of African Central Bankers, c)international institutions, such as IMF and Basel Committee for Banking Regulation, d) commercial private sector, both financial , especially banks, and users of finance, like small enterprises in LICs, e) parliamentarians f) NGOs, and g) specialized media.
The inclusion of senior policy-makers from LIC countries from the start of the project, including in the research design, will enhance the policy relevance and impact of the project. One channel for that will be our high level Senior Advisory Committee that includes a Governor and two Deputy Governors of African Central Banks and other senior policy makers from developing countries and international institutions (AFDB and Commonwealth Secretariat). This will help us identify key policy concerns and ensure our research and policy conclusions are relevant and influential to meet their policy challenges. Furthermore the four case studies will be written by senior academics of the LIC countries, Ghana, Kenya, Nigeria and Ethiopia, who all are closely involved in policy. There will be wider consultation with policy-makers, and results will be presented at our Conference linked to the Annual Meeting of the AFDB. On this and other occasions we would prepare closed briefings for key policy-makers, as well as public meetings with media and civil society.
This close interaction with policy-makers is especially timely as there is a rethink globally, including in LICs, about whether and how best to reshape the financial sector and its regulation, in the wake of the global financial crisis, so it can best serve growth and development. Similarly the issue of managing the capital account is highly topical again, as capital surges towards developing countries, including LICs.
Our project outputs, which will include peer reviewed journal articles, policy briefs and newspaper articles will be widely disseminated. The principal investigator and the whole team have much experience in such dissemination, on which they will build. Great emphasis will be placed on electronic dissemination. A dedicated website would be created at the beginning of the project, hosted on the ODI website, with links to the Institute of Development Studies, at Sussex University, a project partner, as well as with other leading websites, such as IPD, Columbia University. This dedicated website will be key for communicating outcomes; however, targeted electronic mailings (especially policy briefs) will be sent to key policy-makers in the field, especially in LICs.
The fact that ODI and IDS would be collaborating on disseminating the project results has the advantage that these are the two leading UK institutions in research and dissemination of this type of research in UK and to developing countries. Their importance is reflected in the fact that, for example ODI attracted 615000 visitors and two million page views to its website in 2009/2010.Over the last year ODI work on finance attracted 75000 downloads.
Electronic media would be used as far as possible, for example for blogs, YOU Tube, online video streaming of events and meetings-particularly useful to increase participation from different African countries and globally-, electronic frequent consultations within the team and with the Advisory Board and online forums to gather real time opinion on outputs.
Measuring impact will be embedded into the research methodology during all phases. We would produce an M plus E dashboard, which would incorporate the following metrics: ODI impact and uptake log, citations, external assessment of media coverage, mentions by politicians/senior policy makers and Google analytics.
The inclusion of senior policy-makers from LIC countries from the start of the project, including in the research design, will enhance the policy relevance and impact of the project. One channel for that will be our high level Senior Advisory Committee that includes a Governor and two Deputy Governors of African Central Banks and other senior policy makers from developing countries and international institutions (AFDB and Commonwealth Secretariat). This will help us identify key policy concerns and ensure our research and policy conclusions are relevant and influential to meet their policy challenges. Furthermore the four case studies will be written by senior academics of the LIC countries, Ghana, Kenya, Nigeria and Ethiopia, who all are closely involved in policy. There will be wider consultation with policy-makers, and results will be presented at our Conference linked to the Annual Meeting of the AFDB. On this and other occasions we would prepare closed briefings for key policy-makers, as well as public meetings with media and civil society.
This close interaction with policy-makers is especially timely as there is a rethink globally, including in LICs, about whether and how best to reshape the financial sector and its regulation, in the wake of the global financial crisis, so it can best serve growth and development. Similarly the issue of managing the capital account is highly topical again, as capital surges towards developing countries, including LICs.
Our project outputs, which will include peer reviewed journal articles, policy briefs and newspaper articles will be widely disseminated. The principal investigator and the whole team have much experience in such dissemination, on which they will build. Great emphasis will be placed on electronic dissemination. A dedicated website would be created at the beginning of the project, hosted on the ODI website, with links to the Institute of Development Studies, at Sussex University, a project partner, as well as with other leading websites, such as IPD, Columbia University. This dedicated website will be key for communicating outcomes; however, targeted electronic mailings (especially policy briefs) will be sent to key policy-makers in the field, especially in LICs.
The fact that ODI and IDS would be collaborating on disseminating the project results has the advantage that these are the two leading UK institutions in research and dissemination of this type of research in UK and to developing countries. Their importance is reflected in the fact that, for example ODI attracted 615000 visitors and two million page views to its website in 2009/2010.Over the last year ODI work on finance attracted 75000 downloads.
Electronic media would be used as far as possible, for example for blogs, YOU Tube, online video streaming of events and meetings-particularly useful to increase participation from different African countries and globally-, electronic frequent consultations within the team and with the Advisory Board and online forums to gather real time opinion on outputs.
Measuring impact will be embedded into the research methodology during all phases. We would produce an M plus E dashboard, which would incorporate the following metrics: ODI impact and uptake log, citations, external assessment of media coverage, mentions by politicians/senior policy makers and Google analytics.
Publications
Griffith-Jones S
(2014)
A financial sector to support development in low income countries
Zwedu, G. A.
(2014)
Financial Inclusion, Regulation and Inclusive Growth in Ethiopia
| Description | This research project aimed to explore how the financial system in African low-income countries (LICs) should best be regulated and structured to achieve the twin goals of inclusive growth and financial stability. It studied these countries' financial systems, both in regards of domestic structure, including its regulation, and international links, which will facilitate high level of inclusive and sustainable growth in low-income countries, whilst maintaining financial stability. The project identified and researched important specific areas. One such area was the excessive costs (spreads) of bank lending in the countries studied, and in African LICs, in general. We explored the causes of this problem, as well as possible policy measures to deal with them. Broader areas explored were the desirable size and speed of growth of the financial sector in LICs, as well as of its structure. The need to deepen the financial sector, whilst avoiding excessive speed of expansion was emphasized, with a discussion of macro-prudential regulation,(leaning against the wind) as a means to achieve the latter. As regards the structure, emphasis was placed on a more diversified structure, including large and small banks, foreign and national, as well as private and public development banks. All these topics, eg the one of high costs of lending, open new avenues for further research As regards development banks, the interesting experience of well-run Asian development banks, was discussed by well-known experts from Asian countries in seminars in Ghana and Senegal, also attended by senior policy-makers and academics from the African region. Indeed, the project organized a major meetings in Ghana(with DEGRP), which included the most senior policy-makers and academics as speakers(previously reported). This meeting led to the publication of an edited electronic volume by Dirk Te Velde and the Principal Investigator, Stephany Griffith-Jones, with contributions both from project participants and outside experts, (see below) We also had a plenary panel at the Annual Making finance Work for Africa meeting in Senegal, attended by around 300 academics and policy-makers , both from Africa and internationally. More recently, the Principal Investigator, has presented the project at the DFID/ESRC launch of its latest program at ODI, and also commented on Lord Adair Turner's book launch at ODI, whilst also presenting the results of our project to a large London audience. Also this year, she chaired a well- attended panel in Addis Ababa, at the UN Financing for Development Conference The papers, including the introductory framework paper, four in-depth country case studies(Kenya, Ghana, Nigeria and Ethiopia), as well as the papers on reviewing the literature, as well as examining implementation issues for regulation in African LICs(where extensive empirical research was done), and the Conclusions chapter are now all on the Fish network. They have been rigorously edited, and -after careful review by external reviewers- will be published as a book by Routledge in the late spring of 2016. We plan further dissemination activities then, but are already disseminating the publication and its' flyer. Part of the resources of the ESRC/DfId dissemination grant have been used to buy copies of the book at a discount, to send to key policy-makers and academics in Africa, Uk and in international institutions. New research contacts and networks between African, Asian, US and European based collaborators have been established, which can be valuable for further work |
| Exploitation Route | The policy conclusions of the project and book, on structure and on regulation of the financial sector, as well as the risks to financial stability-both domestic and especially from capital flows- are of interest to policy-makers in the African region, as well as those in the public and private sectors of developed economies. Furthermore, as mentioned, we have identified a number of key research and policy areas, which need further deepening; these include cost of lending, need to deepen lending, especially to smaller enterprises, whilst avoiding excessive surges of lending, managing capital flows by both public and private sector borrowers, macro-prudential regulation for low-income countries, etc. These issues could be explored both at a broad level, quantitatively or through further country case studies. The comparative approach, within the region, but also with Asian academics and policy-makers seems very fruitful. |
| Sectors | Education,Financial Services, and Management Consultancy,Government, Democracy and Justice,Other |
| URL | http://www.odi.org/projects/2571-financial-regulation-low-income-countires-inclusive-growth |
| Description | As described in the key findings, the findings have been used in numerous publications, culminating in the book Achieving Financial Stability and Growth in Africa, published by Routledge in March 2016. Fee copies of the book (paperback version) have been distributed to about 200 policy-makers and academics in the region , and worldwide. The ideas of the project have been presented in several key fora (Ghana, Senegal, Yokohama, Washington DC-for spring meetings- London, Addis Ababa, New York) as well as special seminars of the project. Also, some ideas have been discussed with policy makers and financial regulators in the context of semi-structured interviews. This implies the ideas have been discussed with -and in front of -key policy-makers. Some among key issues raised by the research and discussed in research outputs such as the book chapters are the same as those addressed by senior policy makers in Africa, such as high bank spreads in countries such as Kenya. |
| First Year Of Impact | 2013 |
| Sector | Education,Financial Services, and Management Consultancy,Government, Democracy and Justice,Other |
| Impact Types | Economic,Policy & public services |